When it comes to Apple vs. Qualcomm, it’s a battle of the frenemies.
The two companies had a close relationship for at least half a decade, with Qualcomm supplying network connectivity chips for Apple’s iPhones.
But they’re now battling in courts around the world over licensing and patents. The result could put your iPhone at risk.
Qualcomm is the world’s biggest provider of mobile chips, and it created technology that’s essential for connecting phones to cellular networks. The company derives a significant portion of its revenue from licensing those inventions to hundreds of device makers, with the fee based on the value of the phone, not the components. Because Qualcomm owns patents related to 3G, 4G and 5G phones — as well as other features like software — any handset makers building a device that connects to the networks has to pay it a licensing fee, even if they don’t use Qualcomm’s chips.
That includes Apple. The Cupertino, California, giant makes its own applications processor — the brains of the iPhone — but it relies on third-party chips for network connectivity. From the iPhone 4S in 2011 to the iPhone 6S and 6S Plus in 2015, the sole supplier for those chips was Qualcomm. The following year, Apple started using Intel modems in some models of the iPhone 7 and 7 Plus, but it still used Qualcomm in versions for Verizon and Sprint.
It continued that trend in 2017, but Apple’s latest phones — the iPhone XS, XS Max and XR, now only use Intel 4G chips. Apple blamed Qualcomm for that move, though Qualcomm said it would like to supply to Apple. Still, Apple’s move to 5G could be held up by not working with Qualcomm.
Apple thinks it should pay a royalty fee based only on the value of Qualcomm’s connectivity chips, not the entire device. It says Qualcomm is “effectively taxing Apple’s innovation” and that Apple “shouldn’t have to pay them for technology breakthroughs they have nothing to do with.”
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Qualcomm counters that its technology is much more than just connectivity. It’s also multimedia, imaging, GPS and countless other inventions that make a phone a phone. Qualcomm even filed for a patent in 2000, seven years before Apple introduced the iPhone, that is one of the first smartphone descriptions and that describes how to conserve power in a smartphone. Without its technology, Qualcomm says, the iPhone wouldn’t be possible.
The US Federal Trade Commission two years ago sided with Apple and filed an antitrust lawsuit against Qualcomm. It accused the company of operating a monopoly in wireless chips, forcing customers like Apple to work with it exclusively and charging excessive licensing fees for its technology. The two met in a San Jose, California, court in January to argue their case before a judge, and Apple provided some of the FTC’s key witnesses and evidence.
Now it’s time for Apple and Qualcomm to face off directly. The two will meet in court twice in the coming months — early March for a patent infringement trial and mid-April for the licensing dispute.
The outcome of those battles could have implications for the speed and features of upcoming iPhones. Here’s why:
What’s Qualcomm again?
You may not know the Qualcomm name (unless you live in its hometown of San Diego and frequent Qualcomm Stadium), but the odds are pretty high you’ve used a device with its technology. Qualcomm is best known for its chips that connect phones to cellular networks, as well as its Snapdragon processors that act as the brains of mobile devices.
We shouldn’t have to pay them for technology breakthroughs they have nothing to do with.
Apple
Qualcomm is one of the key component suppliers to Samsung and other phone makers (including Apple, until 2018). Without a modem in your device, you wouldn’t be able to hail a Lyft to take you home or check Facebook while you’re waiting in line at a food truck.
What technology does Qualcomm make?
Along with its processors, Qualcomm invents a lot of technology that’s used in mobile devices. The company says it’s invested more than $40 billion in research and development over the past three decades, and its patent portfolio contains more than 130,000 issued patents and patent applications worldwide.
The technology is centered on cellular communications and includes both standard essential patents and nonessential patents. (Standard essential patents are technologies that are vital to a device. They have to be licensed at fair and reasonable terms. Nonessential patents don’t have those requirements.)
Some Qualcomm patents relate to multimedia standards, mobile operating systems, user interfaces, displays, power management, Wi-Fi, Bluetooth and even airplane mode. The company is also the pioneer of CDMA, the 3G mobile network standard used by Verizon and Sprint, and it’s innovated in 4G and 5G network connectivity.
“Qualcomm’s inventions are necessary for the entire cellular network to function — they are not limited to technologies in modem chipsets or even cell phones,” Qualcomm said in a filing.
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Why are Apple and Qualcomm fighting?
It all comes down to money. Apple claims Qualcomm charges too much in licensing fees for its mobile technology. Qualcomm says the iPhone (and other mobile devices) wouldn’t be possible without its technology. Neither can agree on what’s actually a fair licensing fee, so they’re taking their battle to court.
At the same time, Qualcomm accused Apple of infringing its patents for technology like power management.
What does Apple say in its complaints?
In part: “For many years, Qualcomm has unfairly insisted on charging royalties for technologies they have nothing to do with. The more Apple innovates with unique features such as TouchID, advanced displays, and cameras, to name just a few, the more money Qualcomm collects for no reason and the more expensive it becomes for Apple to fund these innovations.”
What does Qualcomm say?
In part: “Apple’s goal is clear — to leverage its immense power to force Qualcomm into accepting less than fair value for the patented technologies that have led innovation in cellular technology and helped Apple generate more than $760 billion in iPhone sales.”
How did the legal battle start?
There’s been a lot of legal back and forth, but here are the basics. Apple initially filed suit against Qualcomm in January 2017 in the US, saying the company didn’t offer fair licensing terms for its mobile technology. Qualcomm fired back in April of that year, denying all Apple’s allegations and accusing Apple of breach of contract and of interfering with agreements and relationships Qualcomm has with contract manufacturers.
Apple continues to use our technology and not pay for it. They’ve really left us no choice but to say, ‘You’ve got to stop this.’
Don Rosenberg, Qualcomm’s general counsel
Apple, through its manufacturers, stopped paying Qualcomm’s licensing fees for iPhones sold in the March quarter of 2017.
“Without an agreed-upon rate to determine how much is owed, we have suspended payments until the correct amount can be determined by the court,” Apple said at the time. “Qualcomm’s demands are unreasonable and they have been charging higher rates based on our innovation, not their own.”
That caused Qualcomm to pursue legal action to get paid. Qualcomm also filed a complaint with the US International Trade Commission in July 2017, asking that some iPhones that used Intel chips be banned from import and sale in the US because Apple allegedly infringed six of Qualcomm’s patents. It also filed suit against Apple in the Southern District of California.
Technology companies in recent years have increasingly turned to the ITC to settle their disputes. Companies can pursue an ITC case in parallel with civil lawsuits, and the threat of an embargo on products typically forces companies to settle more quickly.
“Apple continues to use our technology and not pay for it,” Don Rosenberg, Qualcomm’s general counsel, said in an interview after filing its lawsuits. “They’ve really left us no choice but to say, ‘You’ve got to stop this.'”
What has happened since then?
After Qualcomm asked the ITC to ban some iPhones, the organization in September 2018 agreed that Apple infringed one Qualcomm patent related to power management, but didn’t infringe two other patents. And it said Apple phones shouldn’t be banned, even with the finding of infringement.
Qualcomm initially asserted 88 claims from six patents. The ITC’s decision upheld only one claim from one patent.
And in January, the US Patent and Trademark Office’s Patent Trial and Appeal Board said it would review three Qualcomm patents at issue in its ITC cases against Apple. Such a review can result in the patents being invalidated. One of the patents, No. 9,535,490, is the key patent asserted by Qualcomm in its lawsuit suit against Apple. It covers “power saving techniques in computing devices” that help reduce the electricity consumption by phones.
About 64 percent of the time following an IPR review, all patent claims are invalidated, according to a trial statistics report by the USPTO. And 17 percent of the time, some claims are invalidated.
Meeting in court
What is the March trial between Apple and Qualcomm about?
The first trial between Apple and Qualcomm is all about patents. Qualcomm in July 2017 accused Apple of infringing six non-standard-essential patents. One helps phones switch between high-definition and lower-quality graphics to save battery life. Another lets you do something like stream a video from your phone on Facebook in high definition without compromising the video quality or killing your battery life.
The patents asserted by Qualcomm include No. 8,633,936 (which covers graphics processing architecture that’s higher performing and more power efficient), No. 8,698,558 (which covers “envelope tracking technology” to make the RF signal transmitted by a device more power efficient), No. 8,487,658 (which covers “voltage shifter circuitry” to reduce power consumption), No. 8,838,949 (which relates to “flashless boot” for secondary processors in multiprocessor devices), No. 9,535,490 (which relates to reducing power consumption in electronics) and No. 9,608,675 (which “relates generally to techniques for generating a power supply voltage for a power amplifier that processes multiple transmit signals sent simultaneously, such as multiple transmissions sent simultaneously on multiple carriers at different frequencies”).
Only three of those six patents now remain in the case. And while Apple countersued Qualcomm for patent infringement, that case will be argued in a separate trial in July.
What are the trial logistics?
The trial starts March 4 and is scheduled to last eight days. Court won’t be in session on Fridays. It will be a jury trial overseen by Judge Dana Sabraw in San Diego.
What about the April trial?
The April trial is the big one. This one relates to Apple’s initial complaint, in which it sued Qualcomm claiming unfair licensing terms. Apple also said Qualcomm sought to punish it for cooperating in a South Korean investigation into Qualcomm’s licensing practices by withholding a $1 billion rebate.
Apple wants a court to lower the amount it pays Qualcomm in licensing fees, as well as order the return of the $1 billion.
Qualcomm maintains that no modern handset — including the iPhone — would have been possible “without relying upon Qualcomm’s fundamental cellular technologies.” In its response to Apple’s filing, the company made some counterclaims of its own, including breach of contract and unfair competition. It also asked for an unspecified amount in damages and said Apple had interfered with its relationship with contract manufacturers.
In May 2017, Qualcomm filed a lawsuit against Apple’s iPhone manufacturers that alleged breach of contract. The suit came less than a month after Apple stopped paying patent royalties for Qualcomm technology that’s essential for connecting phones to a wireless network.
In July 2017, those four iPhone makers joined Apple by filing a suit against Qualcomm, alleging it used its market position to charge excessive royalties. The four companies are Foxconn parent Hon Hai Precision Industry, Wistron, Compal Electronics and Pegatron. They’re seeking at least $9 billion in damages, which could be tripled to $27 billion under antitrust law.
What are the logistics for that trial?
The trial starts April 15 and is scheduled to last 20 days. Court won’t be in session on Fridays. It will be a jury trial overseen by Judge Gonzalo Curiel in San Diego.
Patents and more patents
How does Qualcomm’s licensing business work?
Some companies license patents on an individual basis; Qualcomm licenses all its patents as a group. For a set fee — based on the selling price of the end device, typically a phone — the device maker gets to use all of Qualcomm’s technology.
It’s been the norm in the mobile industry for patent holders to base their licensing fees on the total value of a handset, so Qualcomm isn’t alone there. Ericsson, Huawei, Nokia, Samsung and ZTE also charge licensing fees based on the total device. Any company that makes a device that connects to a mobile network has to pay Qualcomm a licensing fee, even if it doesn’t use Qualcomm chips.
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Part of the dispute between Apple and Qualcomm is that Apple believes its licensing fee should be based on the Qualcomm chip used in the device, not the entire phone.
“They do some really great work around standards-essential patents, but it’s one small part of what an iPhone is,” Apple CEO Tim Cook said in May 2017. “It has nothing do with the display or the Touch ID or a gazillion other innovations that Apple has done. And so we don’t think that’s right, and so we’re taking a principled stand on it.”
Who licenses Qualcomm’s technology?
Qualcomm licenses its technology to more than 340 companies, particularly phone vendors. It doesn’t license its patents to chipmakers, though, which is something governments and Apple have taken issue with. Qualcomm argues that chipmakers don’t need licenses because the handset makers already cover the cost of using its technology.
In the case of Apple, it licenses Qualcomm’s technology through its manufacturers, like Foxconn, instead of having a license of its own. Apple said during the January trial that it’s been trying for five years to negotiate a direct license with Qualcomm but that the terms offered — like cross-licensing Apple’s technology — weren’t fair. Apple’s manufacturing partners are also involved in the legal disputes.
In April 2017, Apple said it stopped paying Qualcomm royalties for devices sold during the March quarter. Qualcomm accused the manufacturers of breach of contract and asked a court to make them pay up until the legal battles are resolved. Qualcomm says the licensing fees Apple and its manufacturers are withholding amount to billions of dollars. Apple says it has been overpaying for Qualcomm’s patents and has stopped payments until the legal dispute is resolved.
Qualcomm in October said that Apple owes it $7 billion in patent licensing fees.
So what’s Qualcomm’s licensing fee?
Qualcomm’s licensing fees are based on the total value of a device ($999 in the case of the iPhone XS) versus the value of a chip (closer to $20), but they’re also capped at a certain level. The FTC-Qualcomm battle revealed specific details about Qualcomm’s licensing fees, including the rate Apple paid.
Apple partners paid Qualcomm a licensing fee five times higher than it thought was fair, Apple operating chief Jeff Williams testified during the FTC trial. Apple wanted to pay $1.50 per device in royalties to Qualcomm, based on a 5 percent fee for the cost of each $30 modem connecting iPhones to mobile networks. Instead, it ended up paying $7.50 per phone, he said.
“The whole idea of a percentage of the cost of the phone didn’t make sense to us,” Williams said. “It struck at our very core of fairness. At the time we were making something really, really different.”
Still, Apple agreed to the rate since it was lower than what Qualcomm wanted to charge the contract manufacturers — a 5 percent fee for every iPhone sold, which would equate to about $12 to $20 per device, Williams said. A rebate agreement dropped that to $7.50 per iPhone, and the level stayed steady over the years.
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In November 2017, Chinese handset makers started paying Qualcomm royalties for its 3G and 4G patents at 3.25 percent of the selling price of every phone sold in that country. Qualcomm later rolled that rate out across its licensing base. It also capped the value of handsets, which its royalty is based on, at $400, even if a device sold for triple that. And Qualcomm’s cap for a full portfolio license is $20 per device and $13 for only Qualcomm’s essential patents.
By comparison, in one of its patent battles with Samsung, Apple argued it deserved $40 per device for Samsung’s infringement of five patents, as well as lost profits, for a total of $2.19 billion. A jury ultimately ordered Samsung to pay $119.6 million for infringing three of Apple’s five patents that related to software features like “quick links” and “slide to unlock.”
Does Intel factor into this?
When Apple first launched the iPhone a decade ago, it used modems from Germany’s Infineon. That went on for the next three years until Apple switched to Qualcomm in 2011.
Intel bought Infineon in 2011, but its chips didn’t appear in the iPhone again until 2016’s iPhone 7 and 7 Plus. At that time, US models running on networks from AT&T and T-Mobile started using Intel processors, while Verizon and Sprint versions used Qualcomm. Intel is now the sole supplier of iPhone modems.
Qualcomm has accused Apple of giving trade secrets to Intel. In September, it said in a lawsuit that Apple gave Intel engineers confidential information, including Qualcomm source code and log files, to overcome flaws in their company’s chips used in iPhones. Qualcomm said in a complaint that Apple uses this “second source of chipsets” to pressure it in business negotiations.
The new complaint from Qualcomm is an amendment to the November 2017 suit filed against Apple. Qualcomm said newly uncovered facts have given rise to additional charges against the iPhone maker, including trade secret appropriation and breach of agreement.
Other legal battles
What’s going on between Apple and Qualcomm outside the US?
Apple has filed lawsuits against Qualcomm in China and the UK, while Qualcomm has responded with countersuits in China and Germany.
In early December 2018, a Chinese court ordered four of Apple’s Chinese subsidiaries to stop importing or selling iPhones because of patent infringement. The patents involve technology that lets iPhone users adjust and reformat the size and appearance of photographs, and manage applications using a touchscreen when viewing, navigating and dismissing applications.
Later that same month, a court in Munich found that Apple infringed Qualcomm’s technology for power savings in smartphones and ruled that the iPhone maker must halt sales of the device in Germany. Apple in February resumed selling its iPhone 7 and iPhone 8 in Germany again, but it only offered models with Qualcomm chips. Apple stopped using chips from Intel in the older devices in order to comply with the German court decision.
In January, a different German court, in Mannheim, dismissed Qualcomm’s latest claims against Apple, calling them unfounded. The second German case is related to something called “bulk tension,” or voltage, in iPhones. The ruling from a regional court said Apple didn’t infringe Qualcomm’s patents because voltage in smartphones isn’t constant. It dismissed the claim, but Qualcomm is appealing.
What other legal issues are facing Qualcomm?
Qualcomm has come under a lot of scrutiny in recent years for alleged monopolistic practices. In early 2015, it paid China nearly $1 billion to end a 14-month antitrust investigation in that country. Then, in December 2016, South Korea hit Qualcomm with a $850 million fine following a three-year investigation. The South Korean Fair Trade Commission accused the chipset maker of having an “unfair business model” and creating a monopoly with its practices.
The European Union in January 2018 fined Qualcomm 997.4 million euros ($1.23 billion) for paying Apple to use only its chips. The European regulators have accused the chip giant of violating antitrust laws by making payments to ensure exclusivity.
The US has also accused Qualcomm of operating a monopoly, and that went to court in January 2019.
What was Qualcomm’s battle with the FTC about?
The FTC sued Qualcomm in 2017, and the case went to trial in San Jose two years later. The US government has accused Qualcomm of operating a monopoly in wireless chips, forcing customers like Apple to work with Qualcomm exclusively and charging “excessive” licensing fees for its technology, in part by wielding its “no license, no chips” policy. Qualcomm’s practices prevented rivals from entering the market, drove up the cost of phones and in turn hurt consumers, who faced higher handset prices, the FTC said.
The FTC argued that Qualcomm used its power in the 3G and 4G chip market to force handset makers into the unfair licensing deals. If Qualcomm isn’t stopped, the FTC said, it’ll do the same thing in the 5G market.
Qualcomm said the FTC’s lawsuit is based on “flawed legal theory.” It’s also said customers choose its chips because they’re the best and that it’s never stopped providing processors to customers, even when they’re battling over licenses.
It also said its royalty practices didn’t hurt competitors. Intel now supplies all modems for Apple’s iPhones, MediaTek is the world’s second biggest wireless chipmaker, and Samsung and Huawei have developed their own modems.
Executives from tech’s biggest companies testified about Qualcomm’s licensing practices during January’s trial, revealing the inner workings of the smartphone industry. The FTC and Qualcomm presented their closing arguments Jan. 29, and it’s now up to Judge Lucy Koh to decide the verdict. At the same time, the two sides continue to negotiate a possible settlement.
How did Apple factor into that case?
The FTC complaint specifically related to how Qualcomm dealt with Apple. The US government said that Qualcomm forced Apple to pay licensing fees for its technology in exchange for using its chips in iPhones. It also argued that Qualcomm used its position to demand unreasonably high licensing fees and hurt competition by refusing to license its technology to chip rivals.
“Qualcomm recognized that any competitor that won Apple’s business would become stronger, and used exclusivity to prevent Apple from working with and improving the effectiveness of Qualcomm’s competitors,” the FTC said in a statement at the time it filed its lawsuit.
During the trial, the FTC called Apple Operating Chief Jeff Williams and VP of Procurement Tony Blevins to the stand. Williams testified that that Qualcomm refused to sell modems to Apple for 2018 iPhones because of the companies’ licensing dispute. And Blevins said Apple wanted to build an Intel communication chip into its iPad Mini 2, released in fall 2013, but Qualcomm’s hardball business methods crushed the plan.
Matthias Sauer, an Apple executive and a witness called by Qualcomm, testified that Intel’s modems didn’t meet the technical standards required for the company’s iPhones in 2014. Though Intel also couldn’t meet Apple’s chip requirements for the iPad, it would’ve used them anyway, he said, had Qualcomm not offered incentives to stay with its chips.
The next iPhone
What does this mean for my next iPhone?
Most people don’t really care about what chips are inside their devices, but Qualcomm has a big advantage over Intel: speed.
In mid-February, Qualcomm unveiled the X55 processor, the first modem capable of running on everything from 2G to 5G networks. It’s capable of 7.5 Gbps download speeds and will be in devices in late 2019. Qualcomm’s previous modem, the X50, will be in devices released over the coming months.
Most carriers are just starting to turn on their 5G networks, and smartphone companies are still prepping their first 5G devices. Many major Android vendors — including Samsung, Huawei and LG — unveiled 5G phones at or just ahead of MWC 2019 in February. The initial 5G phones will use the X50 modem, which can deliver download speeds up of 5 Gbps.
By the 2019 holiday season, every major Android vendor in the US will have a 5G phone available using Qualcomm chips.
Intel doesn’t yet have a 5G chip on the market, but it said its 5G modem will be ready for commercial devices in the second half of 2019, with broader deployment in 2020
What about a 5G iPhone?
5G is expected to be 100 times faster than our current 4G LTE wireless technology and 10 times speedier than what Google Fiber offers through a physical connection to the home. Experts say it should enable uses like virtual reality and augmented reality, as well as things we can’t even think of today.
But Apple may be behind with the technology. The company wanted to use Qualcomm’s4G LTE processors in its 2018 iPhones, but the chipmaker wouldn’t sell to it, Apple’s Williams testified in the FTC trial.
Qualcomm continues to provide Apple with chips for its older iPhones, including the iPhone 7 and 7 Plus, he said. But it wouldn’t provide Apple with processors for the newest iPhones for 2018, designed since the two began fighting over patents, he said.
“The strategy was to dual-source in 2018 as well,” Williams in January. “We were working toward doing that with Qualcomm, but in the end they would not support us or sell us chips.”
Williams’ comments appeared to contradict testimony from Qualcomm CEO Steve Mollenkopf from earlier in the FTC trial. He said on the stand that as of spring 2018, Qualcomm still was trying to win a contract supplying chips for iPhones but that it hadn’t “had any new business” from Apple since its previous contracts expired. Because of the trial’s evidence date limitations, he wasn’t allowed to discuss the current state of Qualcomm’s business with Apple.
Other Qualcomm executives have made comments in recent months about their willingness to supply processors to Apple.
During an earnings call in July, Cristiano Amon, the head of Qualcomm’s chip business, said that “if the opportunity present itself, I think we will be a supplier of Apple.” And in September, financial chief George Davis said during a Citi conference, “we would welcome the engagement with Apple on 5G.”
If Apple gets a lower licensing fee, would we pay less for iPhones?
That’s likely a big fat no. Apple has more leverage over pricing when it has two suppliers to play off each other. It’s highly unlikely that it will pass along any of those savings to all of us.
When Apple launched its iPhone X in late 2017, some wondered if the $999 price tag would scare away consumers. Instead, the iPhone X became the best-selling device from the time it hit stores through the end of the June quarter, even though it was the most expensive phone Apple had ever sold.
The 5.8-inch device was $300 more than the 4.7-inch iPhone 8 and $200 more than the 5.5-inch iPhone 8 Plus. Apple followed up this year with the iPhone XS and the bigger and even pricier XS Max, which starts at $1,099.
Apple, facing a slowdown in iPhone sales, needs to generate more money from each device it sells. The company in early January issued a rare warning — its first in 16 years — that it would fall short of its financial projections in the December quarter. Tuesday, it said its sales in the March quarter also would be lower than analysts expected. It pointed to an economic slowdown in China and the country’s “rising trade tensions with the United States” as the main culprits.
Even if Apple pays less for patents, that doesn’t mean we’ll see any benefit from those savings. Its higher prices are likely here to stay.
First published July 9, 2017.
Update, March 1, 2019, at 5:30 a.m. PT: Adds details of recent developments, including the FTC-Qualcomm trial, and notes the impending trial dates in March and April.
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